How to Kickstart a Moribund Economy
As any stand-up comedian knows, timing is everything.
Western economies with only one or two exceptions have yet to escape the recessionary malaise of 2008-2009. The start of the downturn dates from even earlier, the summer of 2007. To still not have resumed meaningful growth six years later suggests we need to take more radical measures.
We may be in the era of "new normal" but at the moment many countries are struggling to attain even the 1-1.5 percent output growth level that (Pimco CEO) Mr El-Erian suggests is our future norm. The construct of the euro isn't helping much either, but for once we aren't going to talk about the euro.
And so, addressed to no one country or government official in particular, is Moorad's 7-point action list on how to get growth back into an economy:
1) Unemployment is your biggest problem. Bar None. The key to growth is in your labor market. Incentivizing companies – all companies – to take on more staff is the one genuine proactive thing you can do to actually help the economy.
First, freeze all employer payroll taxes for 12 months. No actual cost involved here, just an opportunity cost foregone. This will derive instant results.There is no reason to not do this and nothing to stop you. Second, cut red tape on hiring (and firing) that acts as a barrier to new jobs growth and increases the time taken to actually offer a job to an applicant.
2) Infrastructure spending is not the panacea it's cracked up to be, mainly because it takes a long time for its effects to be felt. But bringing it forward does trigger associated planning and expenditure that has positive knock-on effects, so it is still worthwhile. Have a capital expenditure program and be bold about how you raise funds for it (for example, a one-off tax where the proceeds are ring-fenced and used for a specific project).
3) Tax: recognize that the single most important objective is to maximise the tax take whilst minimizing evasion and maximizing incentives to continue with commerce. That means bringing down tax rates, not raising them or maintaining them at high levels. Ian King in The Times today refers to a UK HMRC report that confirms that in the first 12 months after Gordon Brown's government introduced a 50 percent marginal tax rate, the number of people declaring income of 1 million pounds or more fell from 16,000 to 6,000. This resulted in a reduction of 7 billion pounds in tax receipts from that earnings group. Talk about shooting yourself in the foot! Roll back the politics of envy and look to maximize tax take, not maximize pain for high earners.
4) Allied to this, simplify the tax system. When Estonia introduced a flat tax, its tax take increased. Cut down the red tape and eliminate clearly inefficient taxes like stamp duty. This incentivizes increased commercial activity. Stop tinkering, pasty tax here, child benefit there. Look to reduce the size of next year's tax guide, not increase it.
5) Confidence is everything. Post a recession companies and individuals look to cut back spending, pay off debt, postpone spending decisions and delay paying invoices. Uncertainty adds to the gloom (see 1 above). All this delays the recovery. So look at the demand side and stimulate it, not through direct transfers (Western governments are struggling with debt levels as it is so neo-Keynesianism is out) but through reductions in VAT and its scope.
6) Public sector spending doesn't escape. The simple fact is that unless some hard decisions on welfare and other public expenditure are made soon, the debt burden will become unsustainable. There is no point suffering a reputation for implementing "austerity" when the facts are that in the UK welfare spending has increased by 7 percent in the last year and 15 percent since David Cameron came to power. This is hardly what one associates with austerity. Painful decisions need to be made to get hold of this type of spending.
7) Stop the global grandstanding. Maintaining an expeditionary army oversees at a cost of 5 billion pounds a year is not conducive to the public good, in any shape or form. Re-set government policy to be independent rather than slavishly following the line set by the United States (yes (European Commission President) Mr Barroso, we do mean aspire to be a Switzerland or Norway), to the benefit of all your citizens.
Professor Moorad Choudhry is Treasurer, Corporate Banking Division, at The Royal Bank of Scotland.
"The views expressed in this article are an expression of the author's personal views only and do not necessarily reflect the views or policies of The Royal Bank of Scotland Group plc, its subsidiaries or affiliated companies, or its Board of Directors. RBS does not guarantee the accuracy of the data included in this article and accepts no responsibility for any consequence of their use. This article does not constitute an offer or a solicitation of an offer with respect to any particular investment."